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England and Wales Court of Appeal (Civil Division) Decisions
You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Fitzroy House Epworth Street (No. 1) Ltd. & Anor v The Financial Times Ltd.  EWCA Civ 329 (31 March 2006)
Cite as:  1 WLR 2207,  EWCA Civ 329,  WLR 2207
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COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
TECHNOLOGY AND CONSTRUCTION COURT
HHJ THORNTON QC
Strand, London, WC2A 2LL
B e f o r e :
LORD JUSTICE JACOB
LORD JUSTICE MOORE-BICK
| FITZROY HOUSE EPWORTH STREET (NO. 1) LIMITED
FITZROY HOUSE EPWORTH STREET (NO. 2) LIMITED
|- and -
|THE FINANCIAL TIMES LIMITED
Smith Bernal WordWave Limited
190 Fleet Street, London EC4A 2AG
Tel No: 020 7421 4040 Fax No: 020 7831 8838
Official Shorthand Writers to the Court)
Paul Morgan QC (instructed by Wragge & Co LLP) for the Respondent/Defendant
Crown Copyright ©
The Chancellor :
"The Tenant (here meaning the Financial Times only and not its successors in title) may give not less than thirteen months previous notice to the Landlord of termination of this Lease on 1 April 2004. If:
(a) The Tenant has materially complied with all its obligations under this Lease down to the date for which notice of termination has been given;
then the Term shall cease on that date and (subject as mentioned below) no party has any further rights or obligations under this Lease.
Termination of this Lease shall not affect any of the Landlord's rights in connection with any breach by the Tenant or its successors in title or the Guarantor of their obligations under this Lease which may have occurred before the date on which this Lease terminates."
"There shall not be any material breach of the covenants on its part herein contained."
"Without prejudice to any remedy available to the landlord in respect of any breach of covenant on the part of the tenant or the conditions herein contained."
"12. In qualifying clause 7.8 that the breach must be material, it is clearly intended to mitigate that rule as an otherwise trifling breach would disqualify the tenant from exercising the option even though the court might be slow to find such a breach, where it would be unfair to do so.
13. The intention must be to modify that rule to an extent that is reasonably fair to both landlord and tenant. The tenant is given by clause 7.8 the right to break, providing he complies with his covenants to the extent of avoiding any material breach. In my judgment, in that context, the breach is material if, but only if, having regard to all the circumstances, and to the proper efforts of the tenant to comply with his covenants, as well as the adverse effect on the landlord of any failure to do so, it will be fair and reasonable to refuse the tenant the privilege which the lease otherwise grants. The extent of any breach, the practicality of quantifying any damage arising out of it, the efforts made by the tenant to avoid it, the genuine interest which a landlord had in strict compliance are, in my judgment, all material factors in determining materiality."
"No doubt every property must at times be somewhat out of repair, and a tenant must have a reasonable time allowed to do what is necessary: but where it is required as a condition precedent to the granting of a new lease that the lessee's covenants shall have been performed, the lessee who comes to claim the new lease must shew that at that time the property is in such a state as the covenants require it to be. He can easily send in his builder, get a report of what repairs are necessary, and do them before he applies for the lease. There is no hardship in requiring this of him, and I think he is not entitled to excuse himself by saying that the want of repair is trifling. The answer to that is, "No matter; your bargain was to leave the property in thorough repair." If he has not fulfilled his legal bargain, which is also his bargain in equity, he cannot sustain his claim for a lease."
Mellish LJ was of the same view. He pointed out that equity could not relieve the tenant from the consequence of failing to comply with the condition precedent. He added (p.316):
"In a case like this, if a tenant wishes to claim the benefit of such a covenant he should send in his surveyor to see what repairs are needed, and should effect the repairs which the surveyor certifies to be requisite. The Court would be inclined to give credit to a survey thus honestly made, and would lean towards holding the condition precedent to have been complied with. But in the present case it is admitted that there was an existing breach of the covenant to repair."
Baggallay LJ agreed because the condition had not been performed.
"That clause is in an exceedingly familiar form. Such a form - or one so closely resembling it as to be practically indistinguishable - has been in common use for more than a century past. It has been before the Court many times, and it would be dangerous to depart a hair's breadth from decisions upon it in former cases."
As counsel for the Landlords pointed out this case was not cited to either Judge Rich or Judge Thornton. He suggested that they wrongly failed to observe the dictum of Clauson J.
"(1) The first question is whether, on the true construction of the proviso in question, the absence of any material breaches of covenant by the defendants is a condition precedent to the exercise of the option, as well as the giving of the requisite notice purporting to exercise the option. Generally, and admittedly in the present case, the proviso contains a double condition precedent, viz. (i) the absence of any material breaches of covenants and (ii) compliance with the requirement as to notice.
(2) That, however, leaves the crucial question whether the condition precedent (i), that there must be no material breaches of covenant by the defendants, applies to spent as well as to subsisting breaches. This question is covered by dicta in numerous cases, going back in particular to Grey v. Friar (1854) 4 H.L.Cas. 565, and by the decision of Clauson J. in Simons v. Associated Furnishers Ltd.  1 Ch. 379. The upshot of these authorities is that spent breaches will not destroy the tenant's right to exercise the option, but subsisting breaches will. As shown by the passages to which I refer below, the reasoning is in effect as follows. First, it must be accepted that absolute and precise compliance by the tenant with every single covenant throughout the period of the lease prior to the operative date is virtually impossible of attainment. If this were required as a condition precedent, then the option would in practice be worthless or merely at the mercy of the landlord. Therefore the parties cannot have intended that the absence of spent breaches should be a condition precedent. Secondly, however, it is natural and sensible that the landlord should require the tenant not to be in breach of any covenant on the operative date and that all outstanding claims for breach of covenant should have been previously satisfied, so that the lease is then effectively clear. The proviso is therefore to be construed as intended to apply to subsisting breaches, with the result that the relevant condition precedent is the absence of any subsisting breach."
"...the covenants must have been strictly kept, or, if broken, must have been satisfied for. So understood, the words import a condition precedent neither impossible nor unreasonable; and where that is clearly the case, the mere difficulty of performance, from the number or nature of the covenants to be performed, - a fact which must have been perfectly within the knowledge of the party contracting, - seems to me a very unsatisfactory reason for holding it to be otherwise."
"With such a clause the commercial purpose achieved by a condition construed as meaning "no subsisting breach" is readily apparent: before the lease can be ended prematurely all the rent due must have been paid, the property must have been put into a proper state of repair, and the other covenants must have been observed and performed in the sense that all liability in respect of any previous breaches must be at an end. What commercial purpose, in such a case, would be served by the "never any breach" construction of the condition precedent is not so readily apparent."
Bingham LJ commented (p.538):
"Where a tenant wished to take advantage of a break clause, the landlord was not greatly concerned with the history of the tenant's performance before the break. The worse the tenant's performance, the readier the landlord might reasonably be to get rid of him. But whatever the tenant's defaults in the past, the landlord would be very much concerned that at the time of the break the rent should be fully paid (because he could no longer distrain) and the covenants fully observed (so that the property could be re-let or sold without delay or additional expenditure)."
"There is no authority that permits the court to rewrite the condition precedent so as to exclude from account a subsisting breach on the ground that only nominal damages are recoverable."
Later (p.50C) he observed that:
"The court is not entitled to rewrite that covenant [to paint the premises in the last year of the term] or to presume to inform Mr Ripley that the breach of the covenant was only trivial and should be ignored for the purposes of the condition precedent."
Sir Michael Kerr and Parker LJ agreed.
"19. In my judgment, Judge Rich's reasoning is to be followed since it cogently gives meaning to the expression "material" in the context of a breach of covenant and its effect on a break or option clause. In asking whether a breach or compliance is material, it is necessary to ask: "material to what"? The obvious answer is: "material to the landlord and to the obligations of the tenant". The purpose of a clause limiting the right to exercise a break clause is to enable a landlord to preserve his legitimate interest in ensuring compliance with all the tenant's covenants by the tenant before he departs. The landlord has an interest in ensuring compliance so that he can relet speedily, that the value of his reversion is not jeopardised and in preserving his income stream from the property by way of further rent. Thus, a breach of the repairing covenant will only be material if these interests are jeopardised by that breach.
20. I also follow Judge Rich's reasoning because it gives effect to the word "material". If Fitzroy's interpretation is correct, this word is to be given the meaning of "all but insignificant or minor" whereas it in fact means: "in context and taking all relevant considerations into account".
"I conclude that only a few inexpensive patching repairs at most were required to put the roof into a condition which enabled compliance with the repairing covenant at the break date and that nothing further was required to repair or reinstate the paint covering. No substantial defect or breach of covenant was established."
The removal of certain residual traces of asbestos was described in paragraph 67 as a "minor item" which would cost £2,800 to remedy. Complaints in respect of mechanical or electrical items were described in paragraph 80 in the following terms:
"There were a further 12 items which were agreed in a total sum of £1,650 and a further 35 minor items which were all disputed and which totalled, on Fitzroy's figures, £9,590. These items were, in the main, overstated or not breaches of the repairing covenant but even if they were accepted in full, they constituted no more than insubstantial breaches of the repairing covenant."
"The overall effect of my findings is that, taking Fitzroy's approximate figures and applying them to the relatively few and insignificant items which I have found proved, Fitzroy has established a maximum value of defects amounting to breaches of the repairing covenants of no more than £20,000 including supervision fees. This overall figure covers all claimed items including the external, internal and mechanical and electrical items."
"Each party called a lettings and valuation surveyor with a detailed knowledge of the City of London lettings market. These two experts reached substantial agreement as to the relevant factual background. In the light of the relatively limited value of outstanding defects, the two experts' evidence was broadly agreed. The letting market was almost at its bottom in April 2004, which is why Fitzroy was so keen to hold the Financial Times to its lease if at all possible. At that time, there was a vacancy rate of about 16% of the total stock. If a tenant was found, that tenant might well have negotiated up to a two year rent-free period and might have attempted to secure a longer rent-free period if there were significant defects in the building. However, if the total value of the defects was no more than about £20,000, the effect of their evidence was that there would not have been any substantial effect on the ultimate terms agreed. These defects would not have deterred a potential tenant but it might have taken some months to find one and then there would have been a substantial rent-free initial period."
Conclusion – Material Compliance
83. I conclude that the Financial Times had materially complied with all its obligations on 1 April 2004 and it therefore succeeded in breaking the lease and determining it on that date. I reach that conclusion for these reasons:
(1) The number, nature and value of the outstanding defects was insubstantial.
(2) The Financial Times had taken all reasonable steps to put and keep the premises into repair, had spent nearly £1 million for that purpose and had followed professional advice as to what was required.
(3) The Financial Times made all reasonable efforts to secure the agreement of Fitzroy to what was needed to ensure compliance and it is clear that it would have incorporated any reasonable requirement of Fitzroy into its remedial programme if asked.
(4) Fitzroy unreasonably declined to involve itself in the Financial Times's attempts to agree a remedial programme and adopted an attitude of waiting and seeing whether it could catch the Financial Times out on a technicality so as to prevent it from determining the lease because the market was so soft.
(5) The outstanding defects had no effect on the ability of Fitzroy to obtain a further tenant nor on any terms that it could reasonably expect to negotiate. In particular, these defects would not have deterred prospective tenants nor have led to a longer rent-free period or to a lower rent being agreed.
(6) It would be most unreasonable to the Financial Times if it was unable to determine the lease and it would also be most unreasonable if Fitzroy, given its behaviour, was able to prevent such a determination from occurring.
84. Fitzroy contended that the effect of the condition that there should be material compliance with the terms of the lease meant that there would not be material compliance unless the only breaches in existence on the break date were trivial and of the kind that would occur if a screw was missing or loose in a particular location.
85. In my view, that interpretation of the condition is unduly narrow even if the expression "materially complied" has a narrow meaning of the kind contended for by Fitzroy. In other words, whatever meaning is given to this phrase, it was applicable so as to allow the Financial Times to operate the break clause successfully.
86. I reach this conclusion for these reasons:
(1) Each breach that I have found to have existed was, in itself, either minor or trivial. When taken together, the breaches still amounted to minor or trivial breaches of the repairing covenant.
(2) The repairing covenant has two components: namely, firstly, to require the tenant to perform the remedial works so as to put the premises in repair and, secondly, to leave the premises in a repaired state. The Financial Times used all reasonable endeavours to perform its obligations, as is inevitable in a building of any size so it performed and was not in breach of the first part of the covenant. At worst, it left a residual but limited number of limited breaches at the conclusion of the repair programme and was in breach only to that extent.
(3) It is clear from the expert valuers' evidence that the limited nature of the remaining breaches was such that the overall damage to the reversion was negligible or nil. Thus, no recoverable damages, or only trivial damages, resulted from the breaches. If so, the overall effect of the breaches must itself also be minimal or trivial.
85. The lease was determined on 1st April 2004 and the Financial Times is entitled to be repaid its claimed overpaid insurance premium in the sum of £19,058.30. Furthermore, Fitzroy is not entitled to the declarations it seeks nor to the claimed unpaid rent or insurance premiums. I leave for further argument whether it is entitled to any damages for the breaches of the repairing obligations that I have found to exist."
"There is a special difficulty in the present case. The act complained of, the service of the notice to quit, was on the face of it a lawful exercise of a contractual right, duly implemented in accordance with the provisions of the tenancy agreement and effective to terminate the tenant's estate and to convert the landlord's interest from an estate in reversion to an estate in possession. Common experience is that, when the validity of an act done in purported exercise of a right under a contract or other instrument is disputed, the inquiry is limited to ascertaining whether the act has been done in accordance with the provisions of the contract or other instrument. I cannot think of any case in which such an act might be invalidated by proof that it was prompted by some vindictive or other wrong motive. Motive is disregarded as irrelevant. A person who has a right under a contract or other instrument is entitled to exercise it and can effectively exercise it for a good reason or a bad reason or no reason at all. If the rule were different, if the exercise of such a right were liable to be overthrown, in an action brought at any time within the limitation period, by proof that the act was done with a wrong motive, there would be a great unsettlement of property titles and commercial transactions and relationships."
Davies LJ agreed with Pearson LJ.
"If a prospective tenant discovered any deficiencies in the Property how would these have been dealt with?"
The answer was:
"A prospective tenant would have commissioned both structural and mechanical and electrical surveys. If the reports disclosed deficiencies these would have been the subjects of further discussion with the landlord. The number and nature of any deficiencies, together with the anticipated cost and time of remedying these, might have resulted in renegotiation of the terms, depending on their extent. If an adjustment was agreed to be appropriate this would probably have been by way of an extension to the rent free period, which would have been granted as part of the heads of terms already agreed."
"4.10 In my experience, the extent to which the Landlord would be prepared to acknowledge these deficiencies and meet the cost would be dependent on the strength of the market, the seriousness of the negotiations and the status of other interest in the building at that time. As previously stated, the market as at 1st April 2004 was extremely weak and it is my view that the tenant would have been in a strong negotiating position and would have probably been able to negotiate a contribution by the Landlord of in the order of 75% of the cost. It is likely that this cost would be passed on to the tenant rather than the landlord carrying out the work himself and this would have resulted in an extension of the rent free period already agreed to take this into account.
4.11 In summary therefore I do not believe that the deficiencies listed in the Scott Schedule would have had an effect on the rental value or the time taken to let the building but I do believe approximately 75% of the cost would have been met by the Landlord as a result of further negotiation which would have been reflected by an extension in the rent free period."
"The landlord would be keen to re-let his building but there were no reasons for him to concede significantly in order to achieve a letting at a building on which a substantial sum of money had been spent and the result of which produced a product, which would have been attractive to the market. The signs for an improving market were evident and the landlord's willingness, or otherwise, to conclude a deal would have been tempered by an expectation that delay or a lost deal would not ultimately be detrimental."
"It would depend on the overall balance of the parties' positions in negotiations. I come back to the length of commitment, whether there is a break clause, the tenant's covenant that is being offered, all these factors. In those circumstances if it got down to a sum of maybe £5,000/£10,000, I am not sure it would be raised at all. If the sum was, I think the figure has been mentioned of £211,000/£216,000, and that was proven...and related to major factors, possibly a percentage of that would be given. It would still, I reiterate, depend on the overall mix so it is not a straight yes or no."
"The meaning of an ordinary word of the English language is not a question of law.....It is for the tribunal which decides the case to consider, not as law but as fact, whether in the whole circumstances the words of the statute do or do not as a matter of ordinary usage of the English language cover or apply to the facts which have been proved. If it is alleged that the tribunal has reached a wrong decision then there can be a question of law but only of a limited character. The question would normally be whether their decision was unreasonable in the sense that no tribunal acquainted with the ordinary use of language could reasonably reach that decision. Were it otherwise we should reach an impossible position. When considering the meaning of a word one often goes to a dictionary. There one finds other words set out. And if one wants to pursue the matter and find the meaning of those other words the dictionary will give the meaning of those other words in still further words which often include the word for whose meaning one is searching. No doubt the court could act as a dictionary. It could direct the tribunal to take some word or phrase other than the word in the statute and consider whether that word or phrase applied to or covered the facts proved. But we have been warned time and again not to substitute other words for the words of a statute. And there is very good reason for that. Few words have exact synonyms. The overtones are almost always different.